Debt Restructuring

From today's Daily News.

MLGW Restructures Debt
Andy Meek

Memphis Light, Gas and Water Division executives recently approached a group of Memphis City Council members with a seemingly complicated plan to restructure hundreds of millions of dollars of debt on the utility company’s books.

As puzzled council members listened to the presentation, most of them stared blankly. Some openly confessed their confusion. But most of them seemed to grasp at least the basics of the matter, which involved the MLGW executives requesting permission to take $100 million in long-term debt – with interest rates that reset about once a month – and convert that money into fixed-rate debt.

MLGW vice president, chief financial officer and secretary-treasurer John McCullough offered a real-world example to the council members to simplify the discussion. What he told them is the utility company wanted to take pre-emptive action to address a problem not unlike the sticker shock felt by homeowners whose adjustable-rate mortgage payments are set to jump two- or three-fold.

“Auction rates are like the equivalent of a variable-rate mortgage,” McCullough said. “They change. They go up, they go down. What we’re doing with this is changing our variable rate to a fixed rate for the next 10 years.

“We’re locking in a rate that’s lower than our (current) 5 percent. Right now the market is up and down and volatile, and with any luck tomorrow … we’re changing our variable rate to something that’s guaranteed for a 10-year term.”

Feeling the crunch

Put another way, what he basically told the council is the tremors from the credit crunch battering the nation’s housing market also are affecting decisions at MLGW.

An auction-rate security is a long-term chunk of debt that is bought and traded like a short-term investment. Those securities are bought at auctions generally held weekly or once a month. And with each of the auctions, the interest rate resets.

Across the country, municipalities and state governments have millions of dollars tied up in the auction-rate debt market.

Several months ago, it became painfully expensive for entities that use the auction-rate debt market to acquire financing. The auctions began to fail because banks – stung in other areas of the credit market and skittish about letting go of more capital – would not commit to them. Then interest rates were reset higher.

“Part of it was caught up in the way some of these securities were packaged,” said Dana Jeanes, MLGW controller. “The general market started to steer clear, so what would happen is the auction would fail. No one would take (the debt), and the original owner that held it at the time would just be stuck with it.”

The $100 million in auction-rate debt held by MLGW was the result of more than $1 billion in bonds issued by the utility company in 2003 to prepay for electricity from the Tennessee Valley Authority. Interest rates on the debt were about 1 percent at that time, and since have risen closer to 5 percent.

Moving ahead

Before they got any higher, the utility company decided to take action. That’s why its leaders approached the City Council, which has oversight of MLGW, about converting that $100 million in variable-rate debt into a fixed-rate piece of debt.

“We felt like there wasn’t any clear indication that the auction-rate market was going to be steadied and that this problem would go away any time soon,” Jeanes said. “So we felt like this would be a good time to just go ahead and get out of the auction-rate market, lock the debt in, and we locked in at rates under 5 percent. So we don’t have to worry about the fluctuating interest rates any more.”

That decision is one of many examples of how the credit turmoil that’s shaken Wall Street can be felt in parts of the corporate world such as at MLGW, which has a $1.7 billion operating budget and little connection to overextended homeowners.

With demand for auction-rate debt having dried up, the situation has affected municipalities and similar investors around the country. Jefferson County, Ala., for example, had so much auction-rate debt hanging around its neck that the county has been teetering on the edge of bankruptcy, according to national news accounts.

“A lot of companies have been in a situation where they’re trying to get out of auction-rate debt, and it’s been a distressed situation for many of them,” Jeanes said. “Certainly that wasn’t the case for us. Our (situation) was something we deliberately chose to do.”